I've been long XIV for a while now and made another large purchase last week to add to my core shares. In just a week those new shares are already up close to 10%.

Velociraptor, I'm guessing you have had similar success over the past week as the VIX has made a big move down and continues to be in Contango.

I can't complain. My most recent puts are up 5% or about 75% annualized. I have to exit the trade in my tIRA soon. IB is no longer going to allow partnerships in tax advantaged accounts as of the 30th.

I’m confused on how the options prices move on this security. I bought my current PUTS with a strike of 10 when the security was at about 15.5. I’m sure I was right in the middle of a tight bid ask spread. The security spiked and my PUTS lost value accordingly. But last night when I checked my account, when the security was at about 13.5, my contracts were still worth less than what I paid for them. That doesn’t make any sense to me.

I知 confused on how the options prices move on this security. I bought my current PUTS with a strike of 10 when the security was at about 15.5. I知 sure I was right in the middle of a tight bid ask spread. The security spiked and my PUTS lost value accordingly. But last night when I checked my account, when the security was at about 13.5, my contracts were still worth less than what I paid for them. That doesn稚 make any sense to me.

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I paid 5.55 for 10 strikes on 1NOV2017. Underlying was around 15 at the time. Is this similar to what you paid? I'm up 15 cents as of today's close. That's 2.70% or 44.84% annualized.

I知 confused on how the options prices move on this security. I bought my current PUTS with a strike of 10 when the security was at about 15.5. I知 sure I was right in the middle of a tight bid ask spread. The security spiked and my PUTS lost value accordingly. But last night when I checked my account, when the security was at about 13.5, my contracts were still worth less than what I paid for them. That doesn稚 make any sense to me.

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I paid 5.55 for 10 strikes on 1NOV2017. Underlying was around 15 at the time. Is this similar to what you paid? I'm up 15 cents as of today's close. That's 2.70% or 44.84% annualized.

I paid 5.51 on Nov 9. I'm seeing a 3.4% gain since then. What is weird is that when the underlying price spiked, and then fell back to the 15 it was when I bought, my options were worth less than what I paid. Furthermore, the underlying fell yesterday, but my options lost value (about 1%) according to Fidelity.

Bought two 18Jan2019 $9 strike at $4.85 on 20Nov2017. Up 5 cents based on market price (+1.0%) as of 22Nov2017.Bought thirty-five 17Jan2020 $1 strike at $0.57 on 21Nov2017. Up 2 cents based on market (+3.5%) as of 22Nov2017.

I'm curious how the $1 2020s will perform. With TVM being the primary value driver, and $1 being the lowest strike until the next reverse split, I'd imagine rolling them wouldn't be beneficial until after the split. And depending on when that is, it may no longer make sense risk-wise to roll into a super low strike, as the hold period will continue to shorten.

Bought two 18Jan2019 $9 strike at $4.85 on 20Nov2017. Up 5 cents based on market price (+1.0%) as of 22Nov2017.Bought thirty-five 17Jan2020 $1 strike at $0.57 on 21Nov2017. Up 2 cents based on market (+3.5%) as of 22Nov2017.

I'm curious how the $1 2020s will perform. With TVM being the primary value driver, and $1 being the lowest strike until the next reverse split, I'd imagine rolling them wouldn't be beneficial until after the split. And depending on when that is, it may no longer make sense risk-wise to roll into a super low strike, as the hold period will continue to shorten.

Furthermore, the underlying fell yesterday, but my options lost value (about 1%) according to Fidelity.

This could be due to which price Fidelity bases your market value on: bid or market (last price).

Shorter expiries with lower TV will outperform longer dated expiries. This comes at the cost of increased risk. I like to stick with the longest dated available on the date of purchase. There are ways to make a (lot) more money with this trade than with buying the long dated puts. They all entail greater risk though. For my money, capital preservation is an essential motivator. YMMV if you are still in the accumulation phase and still working.

I paid 5.51 on Nov 9. I'm seeing a 3.4% gain since then. What is weird is that when the underlying price spiked, and then fell back to the 15 it was when I bought, my options were worth less than what I paid. Furthermore, the underlying fell yesterday, but my options lost value (about 1%) according to Fidelity.

There are a lot of theories (ok one [black-scholes]) that define how options prices perform. As you are seeing, it can be quite complex. Beneath the level of the underlying is the level of the actual ^VIX. Higher ^VIX supports higher premiums and higher time value. And the underlying is based on futures thereof which means there is an expectations component to the pricing. Just because the underlying is moving your way today does not mean the market expectation is for it continue to do so 40 days from now.

There have been times when UVXY has spiked and I have sold into what should be a negative event because my premium soared anyway. The key is to be sufficiently out of the money and have sufficient time to expiry to take advantage of contango. The ride in between is guaranteed to be bumpy so is not for the feint of heart or for the rent money. Strongly recommend a "sober" allocation size to this trade.

Wow, profoundly interesting. Thank you, FV. I avoid stock-picking, market-timing, and etc., though I keep a small "play" fund around just for things such as this, if/when I decide to try it. Made a good bit on currency trades at one point (mainly on volatility), but would never do so as a core strategy. I'm very fascinated by this discussion, though, and see what you're getting at with the trade. One wonders too if it isn't possible for other such decaying ETFs, too - and if so, why is nobody taking advantage of it?

One sure wonders who takes the other side of these bets. Hedge funds/automated trades? It's interesting.

I'm posting to follow and intend to look hard at this trade. I'm confident I have the psychological constitution to make the bets, but I like to understand it extremely well before I put hard money into something.

I知 confused on how the options prices move on this security. I bought my current PUTS with a strike of 10 when the security was at about 15.5. I知 sure I was right in the middle of a tight bid ask spread. The security spiked and my PUTS lost value accordingly. But last night when I checked my account, when the security was at about 13.5, my contracts were still worth less than what I paid for them. That doesn稚 make any sense to me.

See my earlier post about how volatility sets the price to a greater extent than even delta for longer-term LEAP contracts. Also, your broker will quote your long put position at the bid price, not what you could actually get placing incremental limit orders, dropping a penny at a time and letting them sit for several minutes each iteration. In the case of these puts, your actual value might be 5-10% higher.

Quote

I keep a small "play" fund around just for things such as this, if/when I decide to try it.

Just open a "paper trading" account. Every broker offers one. You can try different strike prices, different maturities, and different strategies all at the same time with no worries of losing a dime. Get to know this trade before putting (hehe..see what I did there?) actual cash on the line.

Once you sell out of a trade how do you think about reentry? I had a strike that was pretty hard to sell out of. I think it was due to bidding to close to the bid ask. But now with the market at an ATH on Friday, it doesnt seem wise to reenter the trade immediately. Is it better to wait for a day where vix increases due to a slight decline in SPY? Was also thinking about buying XIV on the dip too

I'm trying to work with always having two positions with different months' expiry. That way, if there's a spike in the price of uvxy, only one will be completely wiped out. Also, when I sell one, I still have the other one in the market while I'm trying to re-enter.

I bought one of them at "market", and my co-worker (who also trades options) wanted to kick my ass. (I deserved it)

Once you sell out of a trade how do you think about reentry? I had a strike that was pretty hard to sell out of. I think it was due to bidding to close to the bid ask. But now with the market at an ATH on Friday, it doesnt seem wise to reenter the trade immediately. Is it better to wait for a day where vix increases due to a slight decline in SPY? Was also thinking about buying XIV on the dip too

I think there is patience involved in exiting. All of my trades have had tight bid/ask spreads and it still took a while to hit. People seem to be really stingy in their bids.

When I get out of my current trade I have a choice about going for the Jan 2019 or Jan 2020 strikes. The 2020 obviously is safer but given how the 2019s have increased in value (only 4-8% given 30% decay in underlying) I'm guessing the 2020s will move very little. I might stick with the 2019s and accept more risk.

One remaining question that I don't understand is what the effect of the VIX being so low will be on this strategy. Clearly it performs well when VIX is falling (well, VIX futures), but with VIX under 10, can it really go any lower? I understand there is a contango effect that might keep this trade profitable, but I wonder if this might be a more effective endeavor when VIX has room to fall....

One remaining question that I don't understand is what the effect of the VIX being so low will be on this strategy. Clearly it performs well when VIX is falling (well, VIX futures), but with VIX under 10, can it really go any lower? I understand there is a contango effect that might keep this trade profitable, but I wonder if this might be a more effective endeavor when VIX has room to fall....

It depends... At low ^VIX, you often see the premiums increase as volatility spikes as the risk premium rises faster than the loss in "moneyness". I've sold into spikes multiple times for a tidy profit. The contango effect is powerful. The only thing that can counteract it for a "long" period of time is slow but steadily increasing ^VIX that holds the futures in backwardation and keeps them there. That would be a peculiar market. The old adage is the market climbs the stairs and then descends on the elevator. It doesn't have to be that way but that is way it "usually" is.

For certain, you pays your money, you takes your chances. It is just in this case, contango rigs the game in your favor with any sufficiently long investing horizon.

My question now is, when to get back in? Now that UVXY is in single digits, would it be better to wait for a split before getting back in?

I usually get back in immediately after a sale at a lower strike. The upcoming reverse split will not hurt your position or materially impact your liquidity. I've held through several of them. It is a non-event.

Today I established a position in 18 contracts of UVXY 01/17/2020 6.00 P; filled at $4.30. Before my order, the bid was 4.00, and the ask was 4.90. The last trade, before my order, was also at 4.30.

I put my limit order significantly below the midpoint between bid and ask, at 4.30, and it filled immediately.

Schwab, in your account, quotes current price at the midpoint. So I instantly show a $200 gain for the day. I understand that isn't a "real" gain. Good luck trying to realize that today, eh?

But because the order filled instantly, I'm wondering whether I way overpaid, or did I actually get lucky? Or is this just a "ho-hum," not too bad, not too good, business as usual kind of outcome.

At any rate, lesson learned for the future: start your buy limit at the bid, and work it up from there.

(Criticism welcome; the harsher the better)

I start low and work up until the NBBO shows just my contracts on the bid ledger. I'm frequently surprised how far below the last trade I get filled at. Start low and be patient. Opposite when exiting. Start at that ask and work down/ be patient. You probably did OK. If the last fill was between bid/ask, it was probably filled by the market maker rather than a non-broker counterparty. They will always shave a few cents off of you but it is a small price to pay for their liquidity.

You guys are already jumping into big orders! I've only got about $600 all in, because it's part of a trading account where that represents about six months of dividends. I took this barbell approach figuring I wouldn't worry about the wipeout if volatility spikes because the dividends will make me whole.

I looked at the XIV trade and the 5 year charts on Yahoo and Google. It looks like up until 2017, buying vix Jan 1 and holding until Dec was not a winning strategy and the only thing proving that an XIV buy and hold is a winning strategy is the fact that 2017 had a huge run up

You guys are already jumping into big orders! I've only got about $600 all in, because it's part of a trading account where that represents about six months of dividends. I took this barbell approach figuring I wouldn't worry about the wipeout if volatility spikes because the dividends will make me whole.

It's an appropriate size for my portfolio; i.e., a very small %. I've been paper-trading this strategy for well over a month (ever since UVXY ~@16), and I've satisfied myself with its potential before jumping in. The contracts expire a little less than 25 months from now, so I'm comfortable with the time available to ride through any spikes in volatility.

I'd actually be comfortable with a 13 month time frame (per my paper-trading), but I think a 25 month time frame is a more than an adequate runway to start getting some real experience with this strategy.

I'm not out to make a killing. If I can turn a 10% profit every two months or so, fairly consistently, then I'll be quite happy with a 60% annualized return (or even 30%, for that matter). It would give me the option of moving a much larger allocation from fixed income into equities than I am risking in this trade, while keeping my income relatively constant, even if a little less regular.

I looked at the XIV trade and the 5 year charts on Yahoo and Google. It looks like up until 2017, buying vix Jan 1 and holding until Dec was not a winning strategy and the only thing proving that an XIV buy and hold is a winning strategy is the fact that 2017 had a huge run up

I definitely wouldn't suggest a buy and hold strategy for the XIV. If the VIX is in backwardation, then you will get very large drawdowns. The trick is to be in when the VIX is in contango and then move to cash or possibly even VXX when the VIX is in backwardation.

However, even a buy and hold strategy will typically outperform the market in the long-run if the long-term trend is up. However the swings will be dramatic so the key is to limit those big drawdowns by exiting XIV when the VIX term structure appears to be moving out of contango.

I looked at the XIV trade and the 5 year charts on Yahoo and Google. It looks like up until 2017, buying vix Jan 1 and holding until Dec was not a winning strategy and the only thing proving that an XIV buy and hold is a winning strategy is the fact that 2017 had a huge run up

I definitely wouldn't suggest a buy and hold strategy for the XIV. If the VIX is in backwardation, then you will get very large drawdowns. The trick is to be in when the VIX is in contango and then move to cash or possibly even VXX when the VIX is in backwardation.

However, even a buy and hold strategy will typically outperform the market in the long-run if the long-term trend is up. However the swings will be dramatic so the key is to limit those big drawdowns by exiting XIV when the VIX term structure appears to be moving out of contango.

I see, but by the time Vix has entered backwardation won't XIV have already collapsed?

I looked at the XIV trade and the 5 year charts on Yahoo and Google. It looks like up until 2017, buying vix Jan 1 and holding until Dec was not a winning strategy and the only thing proving that an XIV buy and hold is a winning strategy is the fact that 2017 had a huge run up

I definitely wouldn't suggest a buy and hold strategy for the XIV. If the VIX is in backwardation, then you will get very large drawdowns. The trick is to be in when the VIX is in contango and then move to cash or possibly even VXX when the VIX is in backwardation.

However, even a buy and hold strategy will typically outperform the market in the long-run if the long-term trend is up. However the swings will be dramatic so the key is to limit those big drawdowns by exiting XIV when the VIX term structure appears to be moving out of contango.

I see, but by the time Vix has entered backwardation won't XIV have already collapsed?

It will be down for sure, but lets say it drops 15% the day it crosses out of contango - if you are up 30-50% on that trade which is fairly typical when XIV stays in contango for a few months, you would give back some profits but still an amazing return. I have some indicators I use to look at when the term structure appears to be moving out of contango and the idea is to be able to anticipate that move. If you get a false alarm, you can always re-buy. I'm not looking for the whole pie, just some big slices :) Also, this isn't something that happens often, we are talking about 5 times over the past 10 years I believe. Most of the time the market is in an a slow upward drift for all the reasons discussed in these forums and therefore VIX is in contango.

In the event of a black swan event which you might be referring to - I do carry some very cheap out of the money calls on VIX. I view this as insurance on my XIV trading as well as some other market-neutral style trading I do on the SPX. It does eat up some profits but we are talking ~2% and it helps me sleep a little better at night knowing that in the event the market crashes I have a solid hedge that will help offset losses.

Thanks for the follow up. So you are using a site like this http://vixcentral.com/ to watch and see for when it slips into backwardation, at which point you bail until the curve shows signs of upward sloping contango again. I think this makes sense provided you have had time in the market. For example, I could start this trade today and make .89% but if Vix spikes tomorrow I would be wiped out

Thanks for the follow up. So you are using a site like this http://vixcentral.com/ to watch and see for when it slips into backwardation, at which point you bail until the curve shows signs of upward sloping contango again. I think this makes sense provided you have had time in the market. For example, I could start this trade today and make .89% but if Vix spikes tomorrow I would be wiped out

Yes, exactly. I'm not familiar with that website, but I imagine it uses a similar approach. There is definitely a risk of getting in right before a big drop. But the same can be said about any investment. This is a strategy which I plan to implement long-term, so I can't be too concerned about that. Also I limit my risk by only allocating a certain % of my funds to this strategy.

My GTC sell order at $6.20 for the Jan 2019 PUTS at 10 hit two days ago. A bit confused as the bid never seemed to get that high, but not complaining. That represents a 12.5% profit ($625) for a trade in force 47 days. The big question now for re-entering is whether to go for the Jan 2020 or Jan 2019 PUTS. I'm a bit scared as UVXY has basically hovered around 10 for more than a week, but I guess I need to hold faith in the contango.

At first I found it really appealing to have a sell order for some pre-determined return.

Unfortunately, it left me out of the market for a big increase, which meant that I missed most of the gains trying to find a re-entry point. Having two positions means I can mitigate some of that by taking only one off of the table at a time.

What's the benefit of jumping in and out of the trade? All there is to do is occassionally roll down to a lower strike and occassionally roll up the duration.

As I understand it (so I’m probably wrong) there are two reasons. First you can buy a longer dated PUT for more security. Second, and I don’t fully understand why, it is better to own out of the money PUTs, so as the underlying decays to your strike you want to move into a lower strike position. Something about time value being more valuable than intrinsic value something something reasons.

Nasdaq has a goodprice history of specific options but only for one year. for the 2019s it looks like there was a massive fall in july, this seems counter to the thought that contango will always let you win in this trade

There are ways to make a (lot) more money with this trade than with buying the long dated puts. They all entail greater risk though.

Would you mind explaining them?

Alternatively, I'm assuming a similar strategy would work for purchasing LEAPs calls on 3x stable ETFs like UPRO or puts of SPXU, no?

The simplest is a direct short sale of the underlying. If you top up to maintain a fixed level of exposure after each decline, you can make well over 100% annualized. This particular strategy is problematic for two reasons however. The first is that the borrow rate is often quite high and deeply cuts into returns. The second is shares to borrow become scarce during volatility events. You can get forced out at the worst time possible.

There are two other options approaches that have a high risk/reward profile. The first is a synthetic short. The idea is to mimic the trade above but eliminate the problems of borrowing costs and unavailability of shares. You need to continually top up the position as the underlying declines. This trade is riskier than the long put in that the short call is "naked" or uncovered and can put you in a margin violation position if you don't mind position sizing when the trade moves against you during volatility events.

The last is a simple selling of naked calls on the underlying. Same problem as before. It eats up a lot of margin and has theoretically unlimited risk of losses.

I've used all four strategies personally and gravitate towards buying long puts after learning some hard lessons.

Synthetic Shortif I have 10k in my UVXY gambling account and I want to do a synthetic short, I will be required to keep lots of cash so that I can *probably* escape the short call if UVXY skyrockets. I put together a simulated synthetic short in TD Ameritrade at the $10 strike for Jan 2019 and the "effect on buying power" would be $8.19 per share! Buying the position itself would require another $0.42 debit per share. TL;DR: With my $10k I could harness about 1,100 shares this way. The sidelined cash reduces leverage to ~-1.1X and risk is still unlimited. Worse, my broker will force me out of the position if a typically brief volatility event occurs and I come anywhere close to not having enough cash on the sidelines to buy UVXY at whatever it's spiked to. However, the delta on this trade is a whopping 0.93, so you're earning 93% of the inverse of UVXY.

Long PutHad I bought long puts instead, there would be no requirement to hold cash on the sidelines. I could spend 100% of my account on puts. My risk would be that they all expire worthless - a 100% loss, actually less than above. If I'm buying Jan 2019 puts at the $10 strike for today's price of ~ $6.17 per share my $10k account could harness 1,600 shares or ~-1.6X leverage. Plus there would be no risk of being assigned/forced out/margin called; I could ride out a price spike and recover. The only downsides are I would no longer be theta neutral and my delta would be A LOT lower. E.g. these puts have a delta of -0.15, so UVXY would have to fall $1 for my put to increase from $6.17 to $6.32 (a whopping 2.4%)(in all fairness, the price of the put would eventually converge).

SummarySo for tomorrow's $1 fall in price and all other factors being equal, the synthetic short earns me ~0.93 * 1100 shares = $1023 and the long put earns me ~0.15 * 1600 shares = $240. However, the two trades are incomparably different in risk. With the long put, I risk losing 100% of my investment if UVXY is above $10 in a year, and some of my investment if it is above $3.83 but less than $10. With the synthetic short, however, my risk is unlimited. More importantly, I am highly likely to be stopped out at a loss during the next North Korean missile test or inflation blip. The odds of losing are much higher for the synthetic, hence the 4X higher (in the short-term) reward. It might be tempting to just buy SVXY given the low leverage of the synthetic short + cash, and skip the whole assignment risk thing.

One sure wonders who takes the other side of these bets. Hedge funds/automated trades? It's interesting.

I suppose it is those who want to hedge should there be market volatility, for example, people who are normally long on the market, but want to have some upside should there be a calamity.

Yes, that's exactly right. For example, I spend about $200-$300 a month buying very cheap OTM calls on the VIX that work as a hedge. This is like insurance for me. If we get a black swan event where the market goes down 7%-10% in one day, the VIX calls I have will offset the losses for some market neutral trading I do on SPX. I view this as insurance or a necessary business expense to ensure that I don't wipe out my trading capital which is fundamental to my monthly income. Overall it's a very small drag on my return so not a big deal. However, you can imagine some of the hedges that large firms have on.

I closed my XIV trade today as some of my indicators are starting to turn. The closed trade netted a 29.3% gain in 61 days. It's very possible that I'll re-enter shortly if VIX retraces over the next few days.

I'm looking at a number of things. Here are a few of the most important.

- VIX and VIX futures term structure- 10 DMA VXV/ 10 DMA VIX (I track this daily and look at the slope). I read a white paper a while back where this was the only indicator used and produced very good results. I think they used a number of 1.05 or 1.10 and higher to remain in XIV.- Overall market analysis (specifically the chart on the SPX)

There are a number of websites dedicated to similar analysis. One which has been running for a while and I do look at from time to time is xivinvestment.com. Although I believe they are on a one-day lag with their recommendations. A lot of times I don't necessarily agree with their buy/sell signals and I'm not really sure what they use. For example, they issued a sell recommendation in early December that I didn't agree with and it looks like they held through yesterday and today - based on my indicators I decided it was a good time to close my position and wait to see what happens over the next few days for a possible re-enter.